Big Oil Moves into Minerals

Sohio follows the pack by bidding for Kennecott

When Thomas D. Barrow, 56, resigned as a senior vice president of Exxon in 1978 to become chairman of Kennecott Corp., the nation's largest copper company (1980 sales: $2.3 billion), he probably figured that his days in the oil business were over. But suddenly last week Barrow found himself back with another oil company. Standard Oil of Ohio made a successful bid to buy Kennecott for $1.8 billion in cash.

The deal is a bonanza for shareholders of Kennecott. Before the agreement was announced, the company's stock was trading for about $27 a share; Sohio is willing to pay about $62. The acquisition also looks promising for Sohio, the U.S.'s 14th largest refiner. The company owns 33% of the trans-Alaska pipeline and has been turning North Slope crude into cash. Last year it had profits of $1.8 billion on revenues of $ 11 billion. Sohio, which already owns some coal and uranium mining operations, has been looking around recently for profitable places to spend its spare cash.

Sohio's proposed purchase of Kennecott marks the third time this month that companies flush with oil profits have sought to use that money to buy mineral and mining firms. Standard Oil of California bid $4 billion for the 80% it does not already own of Amax, which has vast reserves of molybdenum, a metal used to make special steel alloys, and nickel. Seagram Co., the whisky distiller, which sold $2.3 billion worth of Southwest oil and gas properties last month, has offered more than $2 billion for St. Joe Minerals, a producer of lead and zinc.

To industry observers, these corporate unions are as natural as marrying the girl next door. Minerals and mining give the oil companies an opportunity to use their expertise in geological exploration at a time when many other areas of diversification have been blocked. Asks Wall Street Analyst Joseph Clark of Wertheim & Co.: "Where else can the oil companies go?" They can hardly buy up more oil and gas properties without running afoul of antitrust laws. At the same time, oil companies' investments outside of natural minerals have often been bummers. Exxon has reportedly lost heavily on its venture into office equipment, and Mobil has been forced to pump millions into the Montgomery Ward retail chain that it bought in 1976. Moreover, natural resources look like a smart investment. President Reagan's pledge to increase defense spending should increase the demand for strategic materials. The stocks of many mining companies are currently depressed and thus are a good buy.

Wall Street investors expect that other mining companies will soon become targets for takeover bids. They include copper producer Phelps Dodge, Newmont Mining, a major copper and gold producer, and Asarco, the silver and copper concern. Notes Analyst Clark: "The idea is buy low, sell high. And I think copper prices will up faster than oil prices."

There may still be some fierce boardroom battles ahead, however. Some of the brides are a little reluctant. Last week directors of St. Joe Minerals-rejected Seagram's $45 a share bid, calling it "grossly inadequate." Amax has also been cool to Socal's takeover offer, apparently in an effort to drive up the initial offer of as high as $86 a share.

Kennecott, on the other hand, was quick to accept the Sohio bid; it needs the fresh cash to modernize its machinery and protect itself from the vicissitudes of the world copper market. As for Barrow, last week's agreement calls for him to stay on as head of Kennecott and thus return to the oil business as a director of Sohio.

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